Appointed mediator could speed Enron proceedings

Judges put mediator on caseOrder could speed up civil and bankruptcy proceedings

MARY FLOOD and ERIC BERGER, Copyright 2003 Houston Chronicle

Published 5:30 am, Thursday, May 29, 2003

In hopes of cutting short a seemingly endless legal morass, the federal judges overseeing Enron's bankruptcy and huge civil lawsuits Wednesday ordered the company and some key parties to mediation.

U.S. District Judge Melinda Harmon in Houston and U.S. Bankruptcy Judge Arthur Gonzalez in Manhattan held a joint hearing by conference call and ordered Enron and its creditors, a group of financial institutions and the shareholder and employee plaintiffs in the would-be class-action suits to all go to mediation in New York.

Though the mediation order came as a surprise to the nearly 100 lawyers gathered in Houston for a scheduling conference that didn't occur Wednesday, most seemed to welcome the news. Court-ordered mediation is common and last year, Harmon and Gonzalez ordered it with respect to Arthur Andersen in this case.

Since the civil and bankruptcy cases have already eaten up hundreds of millions of dollars in legal bills and promise to devour even more, an action that could bring closure makes sense now, lawyers said. The mediation is not binding and what is discussed there cannot be used back in the courtroom. This one is also streamlined in that most of the defendants in the lawsuits are not parties to these talks.

But the financial institutions, many of them both major creditors of Enron and defendants in the Enron lawsuits, are the deepest remaining pockets in the case and if they settle, the multiple individuals and few other businesses in the suits will likely quickly follow.

U.S. District Judge Kevin T. Duffy in Manhattan has agreed to serve as the mediator, Gonzalez said.

Duffy, 70, is a senior federal judge in Manhattan. He has also been a federal prosecutor, a regional administrator for the Securities and Exchange Commission in New York and a law professor. Duffy oversaw the trial of Ramzi Ahmed Yousef, the man who masterminded the World Trade Center bombing of 1993, and sentenced him in 1998 to spend life plus 240 years in prison.

The order signed by Harmon and Gonzalez creates a scheduling mediation representative for each of three groups -- debtors, financial institutions and plaintiffs.

Martin J. Bienenstock, a New York City-based lawyer who has served as Enron's top legal adviser for the bankruptcy will represent Enron and its creditors.

"We think it's a great idea," Bienenstock said late Wednesday. He said you can't predict how long a mediation like this might take. "But initially it might look like it's almost irreconcilable," when a second or third try can yield results.

By the end of June, the company is due to release its plan of reorganization, a template for distributing cash and shares in select Enron pipeline and power assets among the company's 24,000 creditors. A settlement between Enron and the banks named in the shareholder litigation is a critical step toward confirmation of the reorganization plan.

That's because Enron is considering legal action against banks that may have played a role in its collapse, with the goal of recovering more cash for creditors.

And the mediation could jump-start talks over the question of debt subordination.

The large investment banks, owed hundreds of millions or even billions in the bankruptcy, may see some of that debt subordinated beneath the interests of other creditors if the banks are judged to have done wrong by a bankruptcy-court-appointed examiner.

William Lerach, a San Diego lawyer representing the lead plaintiffs in the shareholder lawsuit, will represent the plaintiffs in his suit and the employees suit for mediation scheduling purposes.

He said the decision to bring the banks to the table now makes sense even though case discovery has not officially begun. He said the key victory here was keeping the banks in the shareholder lawsuit despite highly contested motions to dismiss.

"Every experienced, savvy person knows the banks are in trouble here," Lerach said. "I think everyone recognizes the banks will pay for the lion's share of the settlement, not to say that other defendants don't have a lot of liability."

Lerach said one stumbling block will be the conflict involved in the banks being both creditors of Enron and defendants in the lawsuit.

"A great deal of time and money has been devoted to these cases already, and in the interest of the shareholders, we applaud the courts' action to help speed restitution to those victimized in the Enron fraud," Davis said.

Richard W. Clancy, a New York City-based lawyer for Credit Suisse First Boston, will represent the financial institutions' group.

Richard Mithoff, the Houston-based lawyer for J.P. Morgan, said, "We welcome this process to help bring this litigation to a conclusion."

Wednesday's hearing was billed as a "status conference" and attracted lawyers from both coasts to the Houston courtroom. But no status conference was held.

The mediation order took the amassed lawyers by surprise. Harmon said this is an appropriate time to see if this case could be resolved through court-ordered mediation.

Some speculated the judges decided to do it at the last minute, possibly to save the the bankruptcy examiner, whose investigation has been called "out of control" by some critics, from being bruised in the expected court discussion.

Others speculated the judges may have gathered lawyers from around the country for the mediation announcement because just being in the room, with around 100 attorneys buzzing around, made clear how unwieldy the Enron civil and bankruptcy proceedings will be.